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Gold Standard

Supporting the return to the gold standard (as, say, Ron Paul does) depends on two assumptions: 1) it’s bad to let currencies float – they should be pegged to something 2) the best thing to peg them to is gold, because gold has “intrinsic” value I think reasonable people can debate 1). Economists seem to like floating currencies as they tends to balance trade surplus/deficits, but floating currencies also leave lots of room for manipulation by speculators etc. My biggest problem is with 2). Gold has no more intrinsic value than dollar bills. Things people want have value, period. I suppose you could argue that certain value is more resistant to major cultural, political, environmental upheavels, but in that case I’d say guns and bread would probably have the most durable value. Beyond jewelry, gold is good for stereo wires and a few other niche things. People who think it has some magical intrinsic value just don’t understand the basis of value and therefore economics.

It’s true that currency can be anything as long as people “trust if for exchange.” However, what leads to that trust? I’d argue that for currency it’s scarcity.That’s why most people don’t use pebbles — people can pretty much find pebbles wherever they want and there’s no scarcity at all. But gold is intrinsically hard to find — you have to dig deep, dig long, and all you find are a few ounces at a time. That’s the real reason why people turn to gold as a currency — not because it’s intrinsically “valuable” because of its use in stereo wires or other manufactured goods, but because it’s intrinsically scarce.

Agree value of gold not magically objective. But it has major things in its favor. It can’t be created, it must be mined, so you can’t arbitrarily create more (nor is it easy to destroy). It is highly divisible so it can represent the full array of values relative to other goods. And it stores stably over long time periods. Clamshells, paper, guns, bread, don’t have these properties. Paper money is a great tool for gov’t power without people’s consent however, via funding through inflation.

thats probably the best argument i’ve ever heard for gold. but of course there are many things that are scarce, including dollar bills. you need scarcity and also confidence that other people also think its valuable. i don’t understand why gold bugs don’t just drop the gold thing and just argue for some kind of algorithmic fed money supply policy.

I guess theoretically gold-standard would have higher political fallout to being broken than just changing the algorithm at some point if it becomes inconvenient. Plus I suppose it appears simpler. We’re infatuated with maintaining moderate inflation though. Even if it penalizes saving and gives gov’t more power. gov’t doesn’t want a stable store of value basically.

Ditto what shearic said above in his first comment, but Chris you missed the point. It is not solely that gold is scarce, but it is also INELASTIC. Paper money is made of well … at best paper, and today it is mostly 1’s and 0’s on computer screens. Push a button and there is more.Also you miss Ron Paul’s point as well. Nearly every time someone asks him about the gold standard, he takes the opportunity to say he is for competition between standard, gold being one of these potential standards.The Fed would need to be 100% transparent for any kind of algorithmic solution to even be considered.

Chris — Recently I’ve been wondering the same thing. I started with the same intuitions, but just had to assume the gold convertibility crowd isn’t THAT naive. I recommend this article written by a “young” (40 y.o.) Alan Greenspan if you’re really interested. http://bit.ly/dhYKvaI haven’t thought about the issue enough to stake out my own conclusions here, but I think that’s a worthy read to get an angle on where supporters are coming from.

jakehow – if that’s indeed Ron Paul’s position its much more reasonable than I thought. If you look at the performance of human Fed chairman’s, especially greenspan, I think its pretty easy to argue he did more harm than good. That said, seems like getting rid of the fed is throwing the baby out with the bathwater. monetary policy is still an important tool for moderating business cycles. probably the best solution is to have a simple, trasnsparent algorithm guiding money supply.

Wasn’t/isn’t there an algorithm in place? It’s to keep inflation in a certain range. Their success on that front has had some interesting externalities I’d say. I think if you keep moderating the business cycle you keep pushing bubbles up and it seems eventual corrections would have to be more severe (as things get farther and farther above fair value (like house price/rent ratio)). There’s a good argument (IMHO) that monetary policy was a strong causal factor both in the great depression as well as our current situation. Most recently, moderating the recession after the dot-com bust fed the housing bubble – which seemed great to many for a while, but ultimately has us where we are now and for the next number of years.

Right, the austrian position is that the fiddling with monetary policy actually causes the bubble in the first place, and the crash is an inevitable consequence, ie the business cycle argument is false.shearic- There is no control algorithm right now, it is totally arbitrary, though I am sure they use tons of calculations to help them decide when to actually flip the switch. Also when necessary the definition of the stats just gets changed. See http://www.shadowstats.com/ He calculates stats against some of the older ‘definitions’ of these stats as well as alternative definitions from independent sources.

Warren Buffett’s comment on hitching currency to gold is amusing,“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”But one could always make that argument about all manner of items that people value.

I think inflation is mostly a natural by-product of our psychology. We deal better with absolute vs. relative numbers. Without inflation, and even without product innovation, a growing working population would require salaries to go down. We’d then have to be happy if our boss cut our salary less than the rate of deflation, but that’s a weird way to have to think. This is related to the idea that deflation causes people not to spend (since the purchase in the future will be cheaper).The problem on the other side is we’ve seen what happens when people spend recklessly.It would be an interesting exercise, since so much monetary information is electronic these days, to be able to filter any display of dollar amounts you see to be expressed in terms of a dollar price at some fixed point in the past. Quicken, Yahoo Finance, your credit card bill, utility and tax bills, salary, savings accounts, etc. You’d then see your salary go down over time, bread become cheaper, savings account dwindle, etc.Warning though – you probably wouldn’t want to watch the inflation-adjusted performance of the stockmarket. In 1999 dollars, the inflation-adjusted DOW is currently down about 22% from its 1999 level (though it’s roughly break-even nominally).http://online.wsj.com/article/SB10001424052748703991304574621903850508632.html

Actually I think there is something to backing currency with an article of intrinsic value. Our current system (whereby currency is introduced via lending) assumes that infinite growth is possible for an economy and that’s simply not the case. The argument against a floating dollar or any currency for that matter, is that it has a greater potential to be over or undervalued. Also floating currencies are more vulnerable to manipulation than currencies backed by tangible goods. I don’t know nearly enough to have a solidly staked out position, but I’ve heard a lot of interesting arguments for Energy backed currency – as in currency backed by commodities like oil or gas. This is something Ron Paul has also mentioned in the past.